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Aviva: H1 Results
Aviva announced a 21% increase in operating profits (on the European Embedded Value (EEV) basis) for the half year to June 2005. Total operating profit rose 21% to £1,318m, mainly due to a strong performance in general insurance. Life operating profit rose 5% to £857m, with more than 60% of the earnings arising from overseas.
General insurance and health profits rose 18% to £694m and the combined ratio improved to 95% (2004: 97%). Profits from fund management grew strongly , albeit from a low base, to reach £33m (2004:£17m). Fund management profits improved due to a 35% increase in investment sales.
Within the life business performance was patchy, the improved result being due to a strong performance in France (where profits rose 38% to £158m), Italy (up 27% to £47m) and Ireland (up 37% to £22m). Profits declined in the core UK market (down 5.2% to £327m) as well as in the Netherlands, Aviva’s third largest market in Europe.
The company blamed adverse experience variances of £30m and, £50m of higher project expenses for the poorer results in the UK. A decrease in margins in the Netherlands caused by the reduction in bond yields led to a weaker performance there. Lower profits in Italy and Ireland were blamed on changes in product mix.
In general and health insurance, the overall performance was far more even with most regions delivering good results. Led by the core UK market (where profits rose by 18% to £431m), Ireland (up 36% to £83m) and Canada (up 24% to £67m) this business delivered an overall growth of 18%.
The UK general insurance results were helped by a favourable claims experience and good pricing. In an increasing competitive market Aviva has succeeded in achieving a 5% increase in personal motor rates (2004: 2%) and 6% (including indexation) in homeowners rates (2004: 5%). Commercial rates have flattened however and may point to more difficult times ahead.
Aviva has benefited from a recovery in the insurance market and increased exposure to the general insurance market. Lower levels of rate increases in general insurance as well as a rather feeble performance in its life operations do not auger well for growth. The share trades at 644.65p, on a prospective PE (2005 earnings) of 10x which is within the sector range. The yield is 4%.
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